G.R. No. 172087 - Philippine Amusement and Gaming Corp. vs. Bureau of Internal Revenue

The petitioner is the Commissioner of Internal Revenue.
The respondents are V. E. Lednicky and Maria Valero Lednicky, American citizens residing in the Philippines, deriving all their income from Philippine sources during the taxable years involved.
The cases are consolidated for joint decision because they involve the same parties and similar issues.

For 1956, respondents filed their income tax return on March 27, 1957, reporting gross income of ₱1,017,287.65 and net income of ₱733,809.44, resulting in an assessed tax of ₱317,395.41 after withholding tax deduction. They paid ₱326,247.41 on April 15, 1957.
On March 17, 1959, respondents filed an amended 1956 income tax return claiming a deduction of ₱205,939.24 for U.S. federal income taxes paid in 1956 and requested a refund of ₱112,437.90, which the Commissioner did not answer. Respondents subsequently filed a claim with the Court of Tax Appeals (CTA), docketed as CTA Case No. 646 (G.R. No. L-18286).

For 1955, the respondents filed their original income tax return on February 28, 1956, reporting gross income of ₱1,771,124.63 and net income of ₱1,052,550.67. An amended return was filed on April 19, 1956, showing a net income of ₱1,012,554.51 and payment of ₱570,252.00 in taxes. They paid an additional deficiency of ₱16,116.00 on December 5, 1956.
Respondents had previously filed U.S. Federal income tax returns for 1947, 1951, 1952, 1953, and 1954 on income from Philippine sources and remitted payment totaling $264,588.82 to the U.S. government in 1955, inclusive of penalties, delinquency interest, and bank charges.
On August 11, 1958, they amended their 1955 Philippine income tax return to claim deductions totaling ₱516,345.15, including U.S. federal income taxes (₱471,867.32), accrued interest, and remittance charges, and filed a refund claim initially for ₱166,384.00, later reduced to ₱150,269.00 (CTA Case No. 570; G.R. No. L-18169).
For 1957, filed on February 28, 1958, respondents paid ₱196,799.65, later amending the return in 1959 to claim a deduction of ₱190,755.80 for U.S. taxes paid on Philippine-source income, seeking a refund of ₱90,520.75 (CTA Case No. 173; G.R. No. L-21434).

The central issue involves whether U.S. citizens and resident aliens of the Philippines who earn income solely from Philippine sources may deduct U.S. income taxes paid on such income from their Philippine gross income under Section 30(c)(1) of the Philippine Internal Revenue Code.

Whether U.S. citizens residing in the Philippines who derive income exclusively from Philippine sources may claim a deduction for income taxes paid to the U.S. government on such income under Section 30(c)(1) of the Philippine Internal Revenue Code.
Whether the option to deduct foreign income taxes or claim a tax credit applies to alien residents deriving income solely from Philippine sources.
Whether disallowing the foreign tax deduction results in impermissible double taxation of the respondents’ income.